Since the images composed with the older version of Lorax don't boot into X or allow for any installation, submitting as a blocker for F17 alpha under the following F17 alpha release criterion [1]:
The installer must boot (if appropriate) and run on all primary architectures, with all system firmware types that are common on those architectures, from default live image, DVD, and boot.iso install media
[1] https://fedoraproject.org/wiki/Fedora_17_Alpha_Release_Criteria

Created attachment 560077[details]
0001-Fix-removefrom-lines-in-templates-to-work-with-usr-m.patch
I think most of the stuff in the patch is unnecessary because symlinks should make it all work - it's really just the removefrom stuff that's having trouble (because the filelists of the RPMs have changed and filelists don't care about symlinks).
Could you try with this patch and let me know if that works?

I built a test installer with the patch from comment #2 and it is able to create a working minimal install inside a VM (as long as you aren't using virtio disks).
Since the virtio problem (#788662) goes away post-install as soon as I change the VM configuration, I can't see how it would be lorax related.

Discussed at 2012-02-10 blocker review meeting. Accepted as a blocker per criterion "The installer must boot (if appropriate) and run on all primary architectures, with all system firmware types that are common on those architectures, from default live image, DVD, and boot.iso install media". A fixed lorax has been built and TC2 was composed with it, so this can likely be closed, but Tim will re-test with TC2 and confirm before we close it.
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